Tuesday, 25 July 2017

The Bank of England Issues Yet Another Warning on the Credit Bubble

Today’s post reacts to the latest warning from the Bank of
England regarding the ever-growing credit bubble, something which we have
reviewed on a number of occasions here in Financial
Regulation Matters. In addition to the previous warnings regarding the expansion
of markets like the ‘Personal Contract Purchasing’ (PCP) market for cars,
the Bank of England is now threatening even more regulatory supervision for
credit lenders, which has been met with clear opposition from the marketplace.
So, this post will look at these developments and continue to assess the likely
causes and outcomes of this pressing issue.

Yet, one lender has made clear that they consider the Bank
of England to be, for want of a better term, scare mongering. Provident
Financial, a sub-prime lending firm, has stated that it has never changed its
vigilance with regards to lending and has ‘not
observed changes in customer behaviour in relation to either demand for credit
or credit performance’. However, this rebuttal stands as a clear outlier
because other statistics demonstrate a different reality. In the U.K. the
outstanding balance on personal loans for cars, personal loans, and credit
cards rose by 10% in
the last year, and with regards to car loans there has been increasing
concern with respects to increasing rates of delinquencies on both sides of
the Atlantic. The issue then is what may be the cause of the bubble?

There are two lines of reasoning, primarily, to explain the
growing credit bubble. The first is that countries like the U.K. and the U.S.
have become accustomed to certain lifestyles that people are attempting to
maintain without the necessary capital with which to do so. The official
statistics point towards a continuation
of spending in the areas of ‘restaurants and hotels, food and non-alcoholic
beverages, recreation and culture, and miscellaneous goods’, with the latter
being comprised of a number
of elements including personal care, financial services, and insurance
amongst other things including prostitution, oddly enough. However, whilst the
rates of people buying new cars, via a multitude of financing options supports
the sentiment that consumers are ‘binging’
on cheap credit, the other end of the scale is just as compelling. The fact of
the matter is that not everyone who makes up the borrowing statistics are
borrowing to purchase the latest Mercedes, BMW or Jaguar; rather, they are
borrowing to live. Whilst we must place the dire
situation in the U.S. to one side for just one moment, the situation in
Britain is no better. A study
by the University of Bristol found that the rate of ‘problem debt’ i.e.
households unable to meet contractual payments, is rising and fundamentally
affects those on the lower incomes in society. The report continues by
confirming the links between home-ownership, inconsistent employment, age
(households under 30), households with children, mental health and problem debt
– which, as
we know, is not a new connection to make. Once again, the issues of mental
health, ill-health, and a lack of financial education/awareness are proven to
be key factors in over-indebtedness and despite the efforts of regulators,
predatory lending to these vulnerable groups has persisted, although now the
offerings have been reduced and repackaged as ‘instalment
loans’ (a movement led by Provident Financial, coincidentally).

All in all, whilst it is true that certain sections of the
consumer base are binging on cheap credit to purchase items like brand-new
cars, it is important that we do not let this cloud the reality of the situation.
The current situation is a direct
consequence of the Financial Crisis, whereby the poorest in society where left
without to compensate for those who have. The era of austerity is driving vulnerable
people towards modes of finance which not only perpetuate their vulnerability,
but actually make them more vulnerable. The Bank of England, as is its remit,
is right to look at protecting the largest financial institutions from exposure
to the bursting of the bubble, but the real societal
issue lurks underneath the headlines. The era of austerity has created a
section of the population who have very little to lose but lots to gain from
failing to meet their contractual agreements – the necessity of desperation is
evident in today’s Britain, and the Bank of England’s warning provides support
for the notion that there are companies that are more than willing to make a
profit on that desperation; one wonders how many other warnings there will be.

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